What It Measures
The Total Business Inventories to Sales Ratio measures how many months of sales are currently held in inventory across all U.S. businesses. It covers:
- Manufacturing inventories
- Wholesale trade inventories
- Retail trade inventories
Formula: Inventory/Sales Ratio = Total Inventories / Total Monthly Sales
A ratio of 1.4 means businesses hold 1.4 months worth of sales in inventory.
Why It Matters
Economic Cycle Indicator: Rising ratios often precede recessions as demand falls but inventories remain.Supply Chain Health: Shows whether businesses are overstocked or understocked.Production Signal: High inventories may lead to production cuts; low inventories may drive restocking.GDP Impact: Inventory changes are a volatile component of GDP growth.
How to Interpret
Rising Ratio: Can signal weakening demand (sales falling faster than production adjusts) or intentional inventory building.Falling Ratio: Indicates strong demand relative to supply, may signal future production increases.Historical Context: Compare to historical averages for the stage of the business cycle.Sector Breakdown: Manufacturing, wholesale, and retail ratios can tell different stories.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Above 1.45 | Elevated inventories, potential overstocking, recession risk |
| 1.35-1.45 | Moderately elevated inventories |
| 1.25-1.35 | Healthy inventory levels |
| Below 1.25 | Lean inventories, strong demand or supply constraints |
Historical Context
The inventory-to-sales ratio spiked during recessions (reaching 1.48 in 2009 and 1.67 briefly in April 2020) as sales collapsed faster than production. Post-pandemic supply chain disruptions led to intentional inventory building in 2021-2022.